Thursday bullets

• The head of Shari'ah and CEO of IIMF believe that greater transaction document standardization, like the Master Agreement on Treasury Placement released by IIFM, will benefit the industry.
  
• There are a number of articles on Khazanah's S$1.5 billion ($1.1 billion) sukuk, including from Bloomberg, AsiaOne News and and Reuters.
  
• The Deputy Governor of the Central Bank of Malaysia gave a speech at the 21st Conference of Presidents of Law Associations of Asia on Islamic finance. The full text is available as a pdf.
  
• Al Rajhi Investment and Banking Corporation Malaysia Bhd, a subsidiary of the Saudi Islamic bank Al Rajhi Bank joined the Bursa Suq Al-Sila', the commodity murabaha/tawarruq platform in Malaysia.
  
• An article offers a few details about the Family Bank Bahrain, an Islamic microfinance institution that is working with the Grameen Trust.
  
• An article published by Zawya, written by three lawyers at King & Spalding, covers the different trends in how Islamic financial products are taxed.
  
• BMB Islamic released its Global Islamic Finance Report 2010, which in addition to describing the industry's growth also acknowledges that there is a shortage of authentic data on the size, growth and performance of the institutions making up the industry.
  
• The Maldive's Monetary Authority issued the first Islamic banking license to Maldives Islamic Bank Pvt. Ltd.
  
• Bloomberg has another article about the potential for growth in sukuk issuance from Asia while the GCC primary markets are at their slowest pace since 2005.
  
• A commenter for the Guardian Michael Tomasky takes a look at Islamic finance and realizes that the hyperbolic charges leveled against it are ridiculous on further examination.
  
• An Islamic brokerage, Makaseb Islamic Financial Services, in Abu Dhabi is closing.
  
• Malaysian companies Axiata Group Bhd and Malaysia Airports Holding Bhd are planning RM4.2 billion ($1.3 billion) in 7-10 year sukuk and RM3.1 billion ($981 million) in sukuk of unspecified tenor, respectively. The bulk of the Axiata sukuk will be sold to the Employees Provident Fund.
  

Dubai World; Islamic 'lender of last resort'

News about possible options for Dubai World continue to surface in media reports and the latest is that Dubai World may seek to simply rollover its debts and lower the interest payments and repay over an eight to ten year period. The outcome for sukuk holders was not discussed specifically in the reports and I am still not sure whether the Dubai World restructuring will include specific accommodations to account for Shari'ah-compliance concerns. In my opinion, and I am not a scholar so I can't speak definitively about this, that any extension of maturity with continued lease or profit payments could be difficult because it would effectively exchange a delay in repayment for a higher level or repayment, which would probably raise some issues. However, I recall that the Nakheel sukuk incorporated defaults by extending the lease term and continuing the lease payments until repayment (analogous to what is being proposed), while retaining the lease as the source of the payments. This would probably be viewed more favorably because it would not include a delay in repayment in exchange for increasing the principal (by making periodic payments for a longer period). However, not all of the Dubai World Islamic debt is structured as ijara. One source in the FT article said that creditors could receive a share of future profits, which could be a way to extend the maturity by turning a murabaha or other facility into a mudaraba or musharaka. However, the lack of clarity on this issue in the media report suggests that there is either a minority of debt that is Shari'ah-compliant or the issue of Shari'ah-compliance is not at the forefront and is being viewed as a later issue when the general terms are agreed for something to be engineered to work around any issues. The National newspaper also offers its slightly different analysis. The Nakheel sukuk are discussed in another article as JP Morgan indicated in a note that sukuk holders could receive repayment at par.

The Union of Arab Banks says it is finalizing a way to allow Islamic banks to approach the central banks of the region for support. This is an important issue because without 'lender-of-last-resort' protection, Islamic banks are more vulnerable to runs. The lack of this support potentially can turn a liquidity crisis at Islamic banks into a solvency crisis if they are forced to unload assets at fire sale prices to meet depositors' withdrawals. This vulnerability should overshadow the more conservative lending standards in the pronouncements of Islamic banks' supposed immunity to crisis. The interbank market is important for banks to be able to have lower reliance on high levels of liquid assets that can reduce their profitability and thus the competitiveness with conventional banks. Following the launch of larger banks like Istikhlaf, which appears only to be an investment bank at the time being, there will need to be more attention paid to the systemic risk posed by larger Islamic banks. Without liquidity facilities at the central banks, investment banks and retail banks in the Islamic financial industry are extremely vulnerably. Beyond the fleeing of depositors in a 'classic' bank run, the demise of Lehman Brothers and Bear Stearns show how a run can start even without depositors if the wholesale funding partners of a bank withhold credit all at once. Both 'classic' and 'Lehman' runs should be considered in judging the urgency of establishing a 'lender of last resort' facility. When there is a new bank with $3 billion in capital expected, this could translate into $60 billion in assets (assuming a leverage ratio of 20:1). That would be a huge institution that would pose systemic risk to the Islamic financial system. It is an issue that deserves a lot of attention.

Other News

• The Dubai Financial Services Authority issued five Islamic finance handbooks for firms operating in the DIFC.
  
• Having announced last year investments in Chicago and a joint-venture with a publicly traded REIT, Kuwait Finance House is planning further expansion in the US, China and Canada. Other Islamic banks have urged China to consider Islamic banking as a way to attract capital from the Middle East.
  
• Indonesia raised 999 billion rupiah ($108.9 million) in its latest sukuk auction with a maturity range of 5 to 15 years sukuk. It had no winning bids for an 11-year sukuk auction. There have been several recent failed auctions for sukuk with investors demanding too high a yield to be accepted by the Ministry of Finance.
  
• Forbes has an article (written by Oxford Analytica) on the moves towards standardization in Islamic finance.
  
• The Islamic Development Bank will soon launch a roadshow to raise money for Istikhlaf, the 'Islamic Goldman Sachs' expected to begin operations later this year.
  
• Dar Al-Arkan redeemed a $600 million sukuk.
  
• The Jordanian government borrowed $100 million from Jordan Islamic Bank to finance a stockpile of wheat and barley.
  
• Centennial College in Toronto will offer an Islamic finance course starting in May.
  
• Has Islamic finance helped cushion Bahrain from the blow of the global recession? The finance minister thinks so.
  
• The Investment Dar continues to struggle on its restructuring and may seek protection under the country's financial stability law.
  
• Amana Takaful, a Sri Lankan takaful provider received an insurance license in the Maldives. The takaful industry continues to struggle over the lack of sufficient supply of appropriate investments, like sukuk, and a shortage of talent.
  

AAOIFI to investigate breaches of Shari'ah-compliance, S&P predicts $20bn in sukuk pipeline in 2010

Arabian Business is reporting that AAOIFI will begin to investigate breaches of Shari'ah-compliance by Islamic financial institutions. They will work with companies with violations and only will approach authorities if the institutions refuse to comply. The secretary general of AAOIFI, Dr. Mohamad Nedal Alchaar, says that "It will be amicable, as we are the gatekeepers of this industry and we want to work through negotiation" adding that "Only if that does not work, will we go through the authorities". One important thing that is not clear from this article is what specifically will be reviewed. Will AAOIFI review the transaction documents of any institution that claims to be Shari'ah-compliance and pass judgement on the compliance of each product or will it instead focus on ensuring that Islamic financial institutions have the necessary safeguards in place (e.g. a Shari'ah board that reviews the products and audits the activities of the bank on a regular basis)? The AAOIFI guidelines are not universally required and there could be disagreement about whether they apply to Islamic financial institutions in jurisdictions where they are not mandatory.

In general, this is useful to prevent institutions from offering products that are described as Shari'ah-compliant without actually ensuring that they are approved as Shari'ah-compliant. However, if it is done poorly, it could hamper the growth of Islamic finance by restricting Islamic financial institutions from offering new products which may receive approval by the institution's Shari'ah board, but not be approved yet by AAOIFI. I will provide more comments when the scope of the AAOIFI committee is released with more specifics.

Standard & Poor's says that the pipeline for sukuk in 2010 is $20 billion, which would be roughly equal to the total issuance in 2009 ($23.3 billion). This estimate is calculated using those sukuk "publicly announced that is likely to come to market if conditions permit", according to analyst Mohamed Damak. In January 2010, $1.1 billion of sukuk have been issued according to Dealogic, which is up significantly from one year ago when only $77 million were issued as the global financial crisis was still limiting access to capital.

An article describe the CMHC report on Islamic home finance in Canada which I wrote about earlier this week. The public/private initiative Toronto Financial Services Alliance welcomed the CMHC report and said it had established a working group to look at the challenges and opportunities for Toronto in the Islamic finance industry.

The UK-based International Financial Services London released their latest annual report on the Islamic finance industry. The UK remains the largest Western center for Islamic finance with 22 Islamic financial institutions. The U.S. has 9 and this includes the two largest Islamic mutual funds in the world, the Amana Income and Growth funds.

Without going into too much detail, I agree with the Chief Executive of Qatar Financial Centre Regulatory Authority who said it was a "myth" that Islamic financial products are safer than conventional products. Islamic finance can alter the relationship between parties in a financial contract and can encourage equitable dealing and transparency, but it cannot remove risk from investments when they are structured to mirror conventional debt products. The close look that Nakheel's sukuk received when it was at risk of defaulting highlighted some of the areas where the idea that it was asset-based (and thus more secure than conventional debt) were exposed as false because the structure meant that in case of default, it would be treated as an unsecured obligation of Nakheel.

Other News

• The lord mayor of London said that oil companies could turn to the U.K. for Shari'ah-compliant loans.
  
• India is planning to change its regulations to allow non-banking Islamic financial institutions to attract investments from the Gulf and encourage the underbanked Muslim majoirty to participate in the financial system.
  
• Tamweel's chairman said it may still be merged with Amlak in the first quarter of 2010.
  
• DSAM Kauthar commodity funds released its performance results for 2009.
  
• The Central Bank of Bahrain's short-term Sukuk Al-Salam securities were oversubscribed and provide a return of 1.05%.
  
• The Islamic Corporation for the Development of the Private Sector, a part of the Islamic Development Bank said it would work with the government of the Maldives to establish an Islamic bank in the island country.
  
• Bank Islam, a Malaysian Islamic bank, is looking to acquire Islamic banks in Southeast Asia, including in Indonesia.
  
• The Malta regulators are close to being able to publish guidelines on an Islamic securities market, which could be released during the first half of 2010. There are still some legal and technical problems according to the Finance Minister.
  
• Dar Al-Arkan, the Saudi real estate developer is on an international roadshow for a sukuk that could be up to $1 billion.
  

HSBC enters Islamic microfinance market

HSBC Amanah, the Islamic finance part of HSBC, announced that it will launch a pilot project for Islamic microfinance in Rawalpindi, Pakistan with Islamic Relief. There were few details about how the microfinance will be carried out, but HSBC will provide the Shari'ah advisory and product structuring part and Islamic Relief will screen beneficiaries and administer the program. Dinar Standard discussed the opportunities for Islamic finance, particularly Islamic microfinance, to use the rapid growth in mobile phones to expand.

The Principal Financial Group becomes the latest western financial firm to enter Islamic finance, announcing that it will work with CIMB Islamic in Malaysia.

Islamic finance will also soon be available in the Maldives.

A Malaysian paper presents a basic introduction to Islamic finance using the example of how takaful differs from conventional insurance. An Kenyan paper features an article by the CEO of Gulf African Bank, an Islamic bank in the country, about the idea of 'time value of money' in Islamic finance.

Hong Kong will likely not change the tax law before the Airport Authority issues the first sukuk from a government agency in the city-state, although taxes (mostly asset transfer taxes) will be waived to ensure that the sukuk can be competitive with a conventional bond.

Failaka, a company commonly known for its survey of Islamic mutual funds around the world, recently published a guide to Shari'ah scholars with biographical, educational and professional details about the 100 most active Shari'ah scholars in the world.

Islamic financial firm Siraj Capital is launching a web portal on Islamic finance called Sukuk.net to provide information on the rapidly growing area of finance.

CPI Financial has an article on the higher than market returns seen in Shari'ah-compliant indexes in the second quarter of 2008, largely due to their exclusion of financial stocks.

Birmingham, UK is becoming the hub for retail Islamic finance in Europe and business there are encouraged to enter the Islamic finance market.

The Indonesian sukuk will be launched using an ijara structure using Finance Ministry assets. A domestic local currency sukuk will be issued while an international, dollar-denominated one will follow in October. UPDATE: Reuters reports that Indonesia will push back the dollar-denominated international sukuk to November because of lower business activity during the month of Ramadan.

Islamic financial institutions face risks not only from cloning conventional products in Shari'ah-compliant forms, but also from cloning business models of established Islamic financial companies says the governor of the Central Bank of Bahrain.

IFSB Summit in Dubai

The UAE central bank governor Sultan bin Naser Al Suwaidi, speaking at the opening session of the Islamic Financial Services Board (IFSB) Summit in Dubai. In addition to finding more Shari'ah-compliant financial instruments to manage Islamic bank's short-term liquidity managment, he also urged Islamic banks "to find a more transparent way to differentiate between the dividend paid to shareholders and investors (or depositors)". He also reiterated the common call for more harmonization of Shari'ah boards' opinions on Islamic banking and financial products.

• The IFSB press release on the conference is available from the IFSB website.

Shaikh Hamdan Bin Rashid Al Maktoum, deputy ruler of Dubai and Minister of Finance and Industry, said he believes the market demand for Islamic financial services will set the number of Islamic banks. While Tamweel and Amlak Finance have applications for approval to enter the Islamic banking market, the UAE central bank has said it will not issue any more licenses in the near term.

The Secretary General of the IFSB, Rifaat Ahmed Abdul Karim noted that:

"Institutions offering Islamic financial services are growing fast and are emerging as an integral part of the international financial system. Thus it is important to have a coordination of supervisory efforts in banking, the securities market and insurance to safeguard the stability of the global financial system."

This sentiment was supported the governor of the Central Bank of Bahrain

Al Salam Bank Bahrain officially opened its regional hub in Bahrain today.

Qatar Islamic Bank plans to open an Islamic bank in the U.K.

President Gayoom of the Maldives discussed the possibility of an Islamic bank in the country with the Islamic Development Bank

Another article about Islamic banking coming to Kazakhstan